China and the World of Business • China Business and the World

Month: November 2011

The U.S. is ratcheting up the rhetoric in the battle to improve the quality of auditing being done on Chinese firms listing or listed on U.S. stock exchanges. The Securities and Exchange Commission and the Public Company Accounting Oversight Board (PCOAB) are trying to get the China Securities Regulatory Commission to require joint inspections of auditors from both the US and China for Chinese firms listed in the US.

The Chinese, claiming concerns over the revelation of “state secrets” are having none of it, seeing the US request as a violation of Chinese sovereignty.

PCOAB Chairman James Doty is apparently getting frustrated with his Chinese counterparts, who have abruptly cancelled bilateral discussions on the issue.

‘We can’t simply pretend that China is different,; he said. ‘You can’t come sell your securities here and ignore the fact that the law requires and people want to know that the auditor’s been inspected.’

Doty is not a paper-tiger bureaucrat that the Chinese can afford to just ignore:

The [PCOAB], which was created by the Sarbanes-Oxley Act of 2002 after accounting scandals contributed to the collapses of Enron Corp. and WorldCom Inc., has authority to de-register China-based auditors, which could start a chain reaction leading to companies being unable to list on U.S. exchanges.

Doty, SEC Chairman Mary Schapiro, and Senator Chuck Schumer all seem to believe that this tough talk will compel China to give in, believing that China is more afraid of losing access to the capital in US markets than they are of giving auditors a glimpse at the dirty laundry of Chinese state-owned enterprises, or even of China’s actual level of defense spending.

They may be right. But many Chinese policymakers, offered the choice of putting state secrets at risk or funding Chinese firms outside of U.S. equity markets, will be motivated to take the latter course. As I noted in an earlier post, the growing complexity of listing Chinese companies in the US and the maturation of China’s own equity markets make the repatriation of offshore listings an increasingly tempting option both for regulators and companies.

Don’t get me wrong: I think that whatever else might be motivating them, Doty, Schapiro, and Schumer are right to be trying to protect the interests of investors. At the same time, though, they have to recognize two hard truths.

First, it is still unclear whether U.S.-based auditing firms operating in China are passing PCOAB inspections. Not only should the PCOAB attend to that task first, it should make the results of those inspections public. Failing to do so makes US regulators look hypocritical.

Second, the long-term outcome of this effort is less likely going to be a major improvement in corporate transparency in China than to hasten the shift of Chinese equities out of the U.S. and into Chinese exchanges. While US bourses boast far greater liquidity than China, the Shanghai and Shenzhen exchanges have access to a large, relatively undemanding pool of capital hungry for hot new listings. PRC exchanges could easily absorb a steady, modest stream of Chinese companies de-listing in the US and listing (or conducting new offerings) in China.

Doty et al are to be commended for their efforts. Sadly, corporate transparency in China will only improve when the Chinese government demands it in order to protect Chinese investors and/or the global position of Chinese markets.

If one conclusion stands out after all of the panels at the Cable and Satellite Broadcasters’ Association of Asia (CASBAA) conference this week, it is that all of the broadcasters in the region see the challenge posed by New Media (even China Central Television [CCTV]), and none of them are quite sure what to do about it. As one CCTV executive told me, “we all acknowledge now that new media, the Internet, and mobile are the future, and that we want to be a part of that. But the question is ‘how’?

Steve Garton of Synovate suggested in a well-attended breakfast meeting that part of the answer lies with apps. In his presentation, Steve made the case to the region’s broadcasters that they needed to get better at using mobile apps to distribute their content on smartphones and tablets. Specifically, Steve noted that his company’s research around the world had proven that the best way to get in front of users would be for a broadcaster to have its app pre-installed on phones when sold.

It is not hard to foresee an edict from the Central Government requiring all carriers selling smart phones to include a CCTV app on those devices, and the numbers suggest that the Party needs to start looking at mobile as a means to ensure that it is still reaching China’s post-90s generations. According to Flurry Analytics, China began 2011 ranked 10th in the world in the number of global app “sessions” on smartphones and tablets. Growing 870% in the first 10 months of this year, China has passed every country but the US and now ranks second worldwide in app use. And one of the top 10 must used apps? Youku, which, by the way, comes pre-installed on many of China’s handsets and tablets.

I’d wager CCTV and the other broadcasters will not long permit Youku exclusive rights to that space, but all of the terrestrial and cable broadcasters face the same problem: how to attract the user to their apps when those users do not watch the stations? And if they collaborate with Youku and Tudou to distribute their content, what value do the broadcasters add? And what happens to their brands?

We cannot yet rule out the possibility that the broadcasters will move to create a Hulu-type service and pull their content off of the other sites. But that still leaves them with a large back of programming all in one place, and the brutal challenge of getting people to actually use the service. And for all of their production and engineering prowess, Chinese broadcasters are not the bastions of marketing that their U.S. counterparts have been.

For these reasons, the question of how broadcasters will deal with apps and mobile seems to point toward the same eventual solution as do the tricky politics and economics of the broader online video sector: eventual mergers between the broadcasters and the major online video sites.

Richard Bush, who is the director of the Center for Northeast Asian Policy Studies and a senior fellow at the Brookings Institution, offers alarmists in the West some perspective about China and its seemingly inevitable rise to economic leadership in this well-worded article in YaleGlobal.

One fascinating point Bush makes is that China faces a choice with its economic might: either build for domestic prosperity and harmony, letting the US “bear the burden of international leadership,” or it may use its treasure to expand its global influence and power. It is a fascinating point, but I would wager most Chinese would reject the choice. The US has (until recently) enjoyed global power and domestic prosperity, as have Britain, France, Spain, and the Netherlands before it. Why, the thinking will go, must China choose? Can it not have both?

The greatest challenge the world faces with China’s rise is the sense of national entitlement that seems to suffuse popular sentiment, in particular among the young. Being the world’s largest economy should come with the trimmings, they think.

Some Chinese believe that passing this milestone will have automatic consequences for international politics, giving China more international influence. In their view, other countries should then confer more deference on China and accommodate to it on issues that China regards as important, rather than China continuing to accommodate them. At some point, Beijing will likely insist that the head of the International Monetary Fund or World Bank be a Chinese.

Whether practical or not, the people of China will want both prosperity and power, and unless the government begins a campaign to manage those expectations rather soon, the Party will find that it has made a mighty rod for its own back. The government will be expected to deliver on both global power and local prosperity.

That challenge will form the primary driving force behind China’s international relations, whether in defense, diplomacy, economic relations, or commerce and trade. A China so pressured from behind will not sit politely in its seat at the table of global power and learn which fork to use. It will have to insist that the rules created to manage a world led by an Atlantic civilization be changed to address a shift to a world dominated by Pacific powers, including the US.

Rather than panic, which Bush suggests is uncalled-for, the time has come for us to determine which aspects of our global systems of security, diplomacy, economy, and commerce are – for us – non-negotiable, and why. We should try to guide China’s hand at the global table much as Britain guided ours, but we should hold true to our principles and our non-negotiables.

China’s choice has been made for it. The real choice belongs to the West.